Media outlets have reported that in 2023, India saw the highest number of new MLM schemes launched in five years, with over 400 schemes. This information comes from Strategy India, an associate member of the Indian Direct Selling Association (IDSA) and a policy, compliance, and direct-selling consultancy.
Companies like Capcha Pay, Mission Green India, Jivan Daan, and Dhan Vriddhi are on its list of suspected scammers. For the time being, over four thousand of these schemes are allegedly active, as reported by Strategy India. It was challenging to get in touch with the entities named because their websites and email addresses don’t seem to be operational.
Instead of paying out of earnings, operators of such money-circulation network schemes pay out to current investors from cash received from new ones. By utilizing gaps in current consumer protection legislation, many go unpunished. These organizations target low-income communities in their pursuit of investors by promising abnormally high returns in very short periods of time. However, the promoters abandon the project and disappear with the funds when fresh investors dry up.
“The Consumer Protection (Direct Selling) Rules should be revised to remove ambiguity and loopholes to prevent Ponzi and multi-level marketing (MLM) money circulation schemes,” said Pranjal Daniel, chief strategist at Strategy India, in his recent media statement. “A central committee needs to evaluate and monitor all MLM operations, which is vital to curb complex money circulation schemes with claims to increase investors’ wealth through investments in forex trading, cryptocurrencies and NFTs (non-fungible tokens).”
To differentiate between these fraudulent pyramid and money-circulation schemes and legal direct-selling multi-level marketing players, the Ministry of Consumer Affairs updated the Consumer Protection (Direct Selling) Rules in 2021. A notification was released on June 21, last year. Executives, however, have stated that the concept of a network of merchants needs more clarification. The ministry made several adjustments, one of which was to replace “through a network of sellers” with “directly selling through a network of sellers.”
A Ponzi scam, so called because it was popularised by American business magnate Charles Ponzi in the 1920s, solicits money from new investors and then uses that money to repay those who had invested earlier. An appearance of financial success is given to the deceitful plan. The investors are deceived into thinking that their profits are a direct outcome of a successful company, unrelated to the investments made by new victims. Victims in The Tinder Swindler think they are putting money into a permanent relationship with their rich, caring lover, but all they are doing is assisting him in keeping up this facade for when he scams other people.
Companies that engage in multi-level marketing (MLM) rely on commission structures resembling pyramids to sell their products and services to individuals who do not receive a salary. Sales commissions from direct customer sales and commissions from recruiting other participants who must buy products in bulk and resell them to consumers provide two sources of income for anyone involved in such a program. Members of multi-level marketing (MLM) are rewarded to attract people into the system below them, drawing comparisons to unlawful pyramid schemes. Those at the very top of the pyramid usually come out ahead, while those at the very bottom of the pyramid usually lose money. The Body Shop, Amway, and Oriflame are just a handful of well-known brands that operate under the multi-level marketing paradigm. Because of their multi-level marketing strategies, these companies have been the target of scepticism and debate. Merchants of Deception was written by an ex-Amway distributor to reveal the reality of the worldwide company’s multi-level marketing plan.
Indian Direct Selling Industry
Is MLM a Moral Business Practice?
Much more complex than the legal challenge is the MLM’s ethical dilemma. Ethical companies, according to a study in the Journal of Business Ethics, focus on their products rather than their employees when hiring. It is highly susceptible to becoming a pyramid scheme due to its reliance on network recruiting. There is a great deal of ethical risk associated with multi-level marketing because it relies on salespeople to sell to their networks. But there are a lot of people who think multi-level marketing programs are fantastic for starting enterprises. Owners and participants alike may find the model alluring because of the lack of inventory management concerns, the independence it affords, and the low operating costs. Even if joining a multi-level marketing company (MLM) sounds like a fun and lucrative idea, you should conduct your research before committing.
The Amway Case
Company assets belonging to Amway India, which offers health and beauty goods in more than 100 countries, have been provisionally attached by India’s Enforcement Directorate (ED) for INR 750 crore. Amway was involved in pyramid fraud through its direct sales multi-level marketing (MLM) network, according to an ED probe into money laundering. Spreading the word about how members may get rich by joining was the main objective of the organization. The items do not receive any attention. The ED claimed that products are utilized to disguise this multi-level marketing scam as a direct-sale firm. From 2002–03 to 2021–22, Amway’s business operations brought in INR 27,562 crore, according to the agency. Distributors and members in India and the US received a commission of INR 7,588 crore from this. The core business model of the corporation was to sell people on the idea that they could improve their financial situation by joining the organization.
Many such examples may be in one’s peripheral, but one must be competent and self-aware enough to select the appropriate operations. Questions like “Who are the investors?” “Where is the money coming from?” “What are the products?” and “How does the entire business cycle operate?” are the most basic. If one can find satisfactory responses to these questions, he will be well-positioned to determine if the proposed business is a good fit for him.
The cryptocurrency market has found millions of investors in India over recent years. While people hesitated to invest in this relatively new asset class during the early years, the rising buzz and FOMO around cryptocurrencies made many join this bandwagon.
Unfortunately, this rapid growth didn’t attract investors alone. It also caught the attention of scammers. According to a report published by Inc42, Indians have been duped of over 72,000 crores by cryptocurrency Ponzi schemes.
The actual figure can be much higher since Bitconnect alone managed to scam people of over 80,000 crores. These figures are based on the investigative agency’s estimations and charge sheets filed against the key accused.
A significant problem with crypto scams is they are getting more sophisticated with time. Scammers are using varying modus operandi, like phishing, email scams, giveaway scams, etc., making it harder for people to secure their investments.
Although government agencies and popular crypto-exchanging platforms are trying their best to reduce such scams by spreading awareness, it hasn’t delivered the desired results.
Hence, this exhaustive guide has been prepared to help cryptocurrency enthusiasts and investors protect their investments. It aims to make cryptocurrency investors more aware of all the typical ways scammers use to dupe people of their cryptocurrency investments.
People investing in cryptocurrencies must be cautious about their investment storage. Since most investors store their cryptocurrencies in online wallets, hacking instances are likely.
But investors can reduce the risks by becoming more aware of the ways scammers use to steal cryptocurrencies. Scammers can come up with numerous methods to dupe cryptocurrency investors. Still, the most common ways include the following:
1. Social Engineering Scams
An example of the social engineering scam
Investors who are highly social online and spend a lot of time on the internet can often become victims of social engineering scams. These scams involve psychological manipulation and deceit to gather sensitive information like cryptocurrency wallet details from the target. Social engineering scams make people believe they are dealing with a trusted entity.
Scammers start by identifying easy targets online and then developing angles to hook them. Once this step is done, scammers take as much time as needed to win the victim’s trust. It is done to make the victim reveal critical information or make him transfer a certain amount of cryptocurrency to the scammer’s wallet.
Investors participating in several cryptocurrency-related groups, forums, or online communities should be cautious of these scams. If any newly made connection asks to make cryptocurrency transfers or share investment details, view it as a red flag and disconnect immediately.
2. Romance Scams
An example of a crypto romance scam
Romance scams are not new. They have been a tool for scammers for years. Be it dating sites or matrimonial sites; scammers have spread their presence almost everywhere. People fall for romance scams because of the nature of the websites they meet the scammer.
Very few people would think of encountering cryptocurrency scammers on a dating or matrimonial site, and this notion makes a scammer’s work easier. Such scams make the victims believe they are in a reliable relationship and manipulate their emotions to gain an advantage.
Once the victim starts believing the scammer, the regular conversations switch to lucrative cryptocurrency opportunities. Such discussions, paired with the scammer’s manipulative tactics, lead to an eventual transfer of either cryptocurrencies or the revealing of account credentials.
3. Ponzi Schemes
Often known as ‘get rich quick schemes,’ the Ponzi schemes have made Indians lose crores. These schemes are often presented in different forms but have the same objective. Scammers often trick gullible people into investing in a non-existent company or product that promises enviable returns.
The GainBitcoin MLM scheme is its perfect example. This scheme promised a 10% monthly return on investment in the form of Bitcoin. As more people started to invest in this scheme, the key accused secretively changed the contract terms and started offering pre-mined tokens called MCAP instead of Bitcoin. MCAP had no value and was not listed on any exchange platform.
But people kept investing in this Ponzi scheme till it was too late. As a result, investors collectively lost over 20,000 crores to this scam. If any scheme offers unreasonably high returns, investors should stay away from it.
4. Defi Rug Pulls
These are the newest types of scams in the cryptocurrency space. Under this method, scammers use social media and messaging platforms to increase NFT project prices or cryptocurrency. Once people invest their money into the cryptocurrency or NFT project, the creators disappear with all the money.
One of the most popular Defi rug pull scams was the one around a cryptocurrency created on the popular South Korean Squid Games theme. Surprisingly, the cryptocurrency had nothing to do with the Squid Games series creator, but the scammers made it appear that way.
It helped them attract investors. Hence, one of the effective, best ways to prevent being a victim of such scams is by investing in cryptocurrencies or NFT projects with reliable credentials.
5. Fake Crypto Investment Schemes
Fake crypto investment scheme example
Similar to a Ponzi scheme, investors are made to invest in companies or cryptocurrencies that don’t exist. Morris coin is a very recent example of this scam. The creators of Morris coin presented it as a highly sophisticated cryptocurrency built using blockchain technology.
The investors were promised huge returns against their investment. But once the creators collected enough investments, they disappeared. When Enforcement Directorate (ED) conducted raids and initiated an investigation, they found no such coin existed.
It is just one example of a fake cryptocurrency investment scheme, many more exist. Scammers can lure people into investing their money into a project they have no intention of creating. Such scams can also be conducted by offering an Initial Coin Offering (ICO).
6. Fake Celebrity Investments
An example of a celebrity investment crypto scam
Cryptocurrency enthusiasts and investors who follow celebrities online are more vulnerable to such scams. The incidence of scammers hacking the Twitter accounts of various known celebrities is still not old.
Under this method, scammers either hack a blue-tick-verified social media account or create a replica of it. In both cases, the scammers then ask the followers to transfer some cryptocurrencies to the shared wallet details in exchange for lucrative returns.
Since the message appears to be from a celebrity, many fall for this scam. They initiate a transfer, expecting a return. Accounts of eminent personalities like Elon Musk were hacked earlier, and by the time the authorities received the accounts, people had already lost millions to scammers.
7. Pump & Dump
An example of pump and dump crypto scheme
The pump and dump scheme is an age-old scheme wherein the project creators use illicit ways to raise the price of a worthless asset in a short period. Once the price picks up, the entire asset is sold off in the market for a massive profit.
Even though pump-and-dump schemes are considered illegal under securities law, they are very commonly used in the cryptocurrency world.
Investors should be careful of investing in a relatively new cryptocurrency that shows unrealistic price growth in a shorter period. Anything that appears way good to be true should be avoided to prevent falling victim to such scams.
8. Phishing Schemes
Example of a phishing scam
Phishing scams are widespread, especially in the cryptocurrency industry. Various sophisticated phishing scams are carried out almost daily to gain access to investors’ cryptocurrency wallet keys.
These are the keys required to gain access to the funds or purchased cryptocurrency stored in the wallet. To initiate phishing scams, scammers send emails or messages on social media and messaging platforms.
These messages contain links to landing pages asking people to enter their wallet keys or other sensitive information. Since most of these landing pages look authentic, some fall for them and enter their wallet details.
Once the hackers get this information, stealing cryptocurrency becomes easier for them. A great way to prevent such scams is by always inspecting the URLs of the website.
Cryptocurrency scams have been increasing over recent years. The only way investors can secure their investments is by being proactive. A significant portion of investors keeps their cryptocurrencies in the exchange’s digital wallet, which can get hacked.
There have been various similar incidents in the past that made investors lose millions. To prevent landing in a similar situation, relying on a cold wallet is recommended. These wallets look like USB drive and stores the investment away from the internet.
Besides using cold wallets, investors should also be careful about opening links from emails or messages from unknown people. Scammers often try to gain access to investors’ wallets by making them click on fraudulent links, so staying away from seemingly doubtful links is recommended.
Investors eyeing new ICO launches should always conduct deep research to ensure they don’t invest in scam projects. In a nutshell, the more cautious you are with your investments, the better.
Steps Taken by Government to Reduce the Crypto Scams
Currently, there is no strong legislation to regulate the cryptocurrency market, and scammers take advantage. However, the rising number of complaints and increasing scams have raised alarms, nudging authorities to take strict action.
To reduce fraudulent activities, RBI released a circular in 2021 addressing all concerned entities to carry out a due diligence process before allowing anyone to engage in cryptocurrency trading.
The due diligence has to be in line with the regulations governing the standards for Combatting Financing of Terrorism (CFT), Know Your Customer (KYC), Prevention of Money Laundering (PMLA), and Anti-Money Laundering (AML).
Besides asking entities to follow rigid regulations, the government is also trying its best to spread awareness regarding the different ways scammers use to dupe cryptocurrency investors.
The Ministry of Home Affairs of India runs a Twitter handle named ‘Cyber Dost’ to spread awareness of cybersecurity and safety issues. In 2021, this handle shared valuable tips to help investors secure themselves against rising cryptocurrency frauds. Some of the tips asked the investors to:
Not fall for offers that appear too lucrative
Be vigilant and carry out research before making any investment
Be careful of fake endorsements, etc.
Cyber Dost Twitter page
The awareness posts also asked investors not to make online payments to strangers via gift cards or online transfers. While the government may plan to come up with a bill to regulate the cryptocurrency market in the future, it will always rely heavily on organizing awareness campaigns to educate investors about the prevalent scams.
An informed investor is unlikely to fall for cryptocurrency scams, so the government is trying its best to educate investors. People can expect to see some strong laws in their favor in the future, but till then, they will have to exercise due diligence while dealing in the cryptocurrency market.
The above graph shows the number of times the crypto scamming websites were visited by Indians in millions
Securing Investment & Staying Vigilant Is the Way Forward
One of the best things that attracted people to cryptocurrencies was their decentralized nature. The option to transfer cryptocurrencies while maintaining anonymity was another magnetic feature. While the developers created these USPs to benefit investors’, scammers were quick enough to find ways to use them as loopholes.
Over the years, cryptocurrency investors have lost investments worth millions. These scams were in the form of Ponzi schemes, phishing scams, giveaway scams, and more. These scams are only getting more advanced with every passing day. Hence, the only way left for investors’ to secure themselves against such scams is by being vigilant and proactive.
Not getting attracted to ICOs that promise massive returns, not opening malicious links, and avoiding fake endorsements on social media are some of the ways investors can use to stay safe. Other than these, trading with popular crypto exchanges and using cold wallets to store cryptocurrencies can be used as additional safety measures.
Cryptocurrency has become a new way for investors to earn money while simultaneously it is also regarded as an alternative method to traditional currency. But the prime issue with cryptocurrency is that it involves cyber threats and cyber frauds as all the currency is in digital form only.
The article highlights the types of crypto scams in India and the things investors need to keep in mind while using cryptocurrencies. The article also highlights the steps taken by the Indian government to tackle such situations and lower the scam rate.
FAQs
What are the safest crypto sites?
Some of the safest crypto sites are Kraken, Gemini, Coinbase, Crypto.com, and Binance.
Can crypto be stolen from a wallet?
Yes, with the use of advanced technologies combined with needed knowledge, cryptos can get stolen from the wallet. Some of the most common examples are exchange hacks, exit scams, phishing attacks, etc.
How do hackers steal your crypto?
The hackers can steal the crypto by using their hacking knowledge in order to gain access to the user’s account and can then get it transferred or used as per their desire.
Can crypto be traced by police?
Few cryptocurrencies can be traced by the police by their transactions. But overall, digital currency is difficult to be traced due its digital pattern. The blockchain technology used by Bitcoin makes it much easier to trace the transactions of Bitcoin but it is quite difficult to identify the receiver or sender.
Harshit Verma
